Study of the Determinants of Demand for Propane

Prepared and Presented By:

Joe Looney J.D. Laing Ernest Sonyi

Background

• Propane is used for: – Heating homes – Heating water – Cooking – Drying clothes – Fueling gas fireplaces – As an alternative fuel for vehicles

Background

• Propane is used in the Petrochemical industry to make: – Plastics – Alcohols – Fibers – Cosmetics

Background

• Propane is used in agriculture for: – Crop drying – Weed control – Fuel for farm equipment – Fuel for irrigation pumps

Propane Use by Sector

Objectives

• To determine the variables and interactions of these variables upon the demand for propane in the United States • Attempt to use econometric data to show a direct relationship between propane prices and propane demand

Assumptions

• The weekly supply data for propane reflects a replenishment of used stores of the product in the market • Meets all five assumptions for regression – The model makes sense – There is a significant statistical relationship between variables – There is an acceptable percent variation between variables – There is no problem with autocorrelation – There is no problem with multicollinearity

Hypotheses

• H 1 : Demand for Propane is explained by poultry production • H 2 : Demand for Propane is explained temperature • H 3 : Demand for Propane is explained by prices • H 4 : Demand for Propane is seasonal

Variables

• Dependent Variable – Weekly quantity of Propane supplied to the market • Independent Variables – Weekly poultry slaughter counts • Used as a measure of Agricultural impact on demand – Spot Prices for Propane in Texas, the Midwest and Northwest Europe – Weekly temperature average for the United States – Weekly temperature averages for the Northwest, Northeast, Southwest and Southeast regions of the United States

Variable Identification

• Endogenous – U.S. demand for propane • Exogenous – Temperature averages – Poultry slaughter rates – Propane prices

Methodology

• Used WinORS to analyze data • Weekly data was collected covering the time span between 2004 and 2007 • Stepwise regression was used to identify the statistically significant variables • Ordinary Least Squares was used to test for: – Normality – Homoscedasticity – Autocorrelation – Multicollinearity

Linear Demand Model

Qx = 2226.016 -2.352Tx -7.154Ux-5.108Nx 127.42D1-262.222D2-122.885D3

Qx = Weekly quantity of propane supplied Tx = Weekly spot price of propane in Texas Ux = Weekly temperature average for the US Nx = Weekly temperature average for the Northeast US D1 = Spring Dummy Variable D2 = Summer Dummy Variable D3 = Fall Dummy Variable *all other variables were determined statistically insignificant by the stepwise model

Preditictive Ability Graph

Constant Variance Graph

Statistical Significance and Coefficient of Determination

• The P-Value is 0.00001 therefore it satisfies the 99% confidence interval Root MSE SSQ(Res) Dep. Mean Coef. Of Var. (CV) R-Squared Adj R-Squared 154.774

3808838.392

1234.163

12.541% 74.089% 73.111%

Homoscedasticity and Normality

• P-value for White’s is > .05 therefore the data is homoscedastic • Correlation for Normality is below the approx. Critical Value therefore the data is not normal (flaw of this model) White's Test for Homoscedasticity P value for White’s Correlation for Normality Approx. Critical Value 6.81

0.86988

0.9945

0.999

Autocorrelation

• Durbin value should be > 2, in this case the value is close enough to not reject the data Rho Durbin Durbin H D Lower Limit D Upper Limit Ho: Rho = 0 Rho: Pos & Neg Rho: Positive Rho: Negative 0.019

1.935

n/c 1.651

1.817

Do Not Reject Do Not Reject Do Not Reject

Multicollinearity (VIF)

• All values for VIF for all independent variables should be less than 10 to ensure no multicollinearity

Independent Variable VIF

Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon) 1.042

Weekly Temp Avg - National 15.241

Weekly Temp Avg - NE 14.241

Summer Dummy Spring Dummy Fall Dummy 6.407

3.714

2.393

Elasticity

• The elasticity of all the independent variables is inverse and inelastic

Independent Variable

Weekly Temp Avg - NE

Elasticity

Mont Belvieu, TX Propane Spot Price FOB (Cents per Gallon) -0.18828

Weekly Temp Avg - National -0.35136

-0.22362

Summer Dummy Spring Dummy Fall Dummy -0.03033

-0.07443

-0.02297

Conclusions

• We reject the hypotheses that the demand for propane is explained by poultry production or temperature • We accept only the hypotheses that demand for propane is seasonal and is explained by prices specifically the spot price of propane in Mont Belvieu, TX • The only flaw in the model is that the data may not be normal because the correlation for normality is just below the approx. critical value • The spot price of propane in Mont Belvieu, TX is inversely inelastic to the demand for propane in the U.S. with an elasticity of -0.18828, therefore a 10% increase in the spot price would result in only a decrease of 1.8% in demand nationally